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Carry Trade: Dollar v. Yen

Posted in Central Banks, Currencies by teslik on October 15, 2009

Moneybags_12An interesting question came up at a meeting I went to the other day: Why has the yen carry trade shifted so profoundly to a dollar carry, when it seems probable that the United States will have to raise interest rates before Japan will?  A few people mentioned liquidity, but clearly there is enough yen liquidity to support an active carry trade, given that the yen was, for years, the primary vehicle for carry trade borrowing.  Another argument, which one of my colleagues mentioned, is that markets are nervous about the new Japanese government launching an intervention to stabilize the yen.  That’s interesting.  I wonder how long it will take for the new government to reassure traders that this isn’t the case–and then if we will see a re-reversion back to the yen carry.

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